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The ECB as Lender of Last Resort for Sovereigns in the Euro Area

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  • Buiter, Willem H.
  • Rahbari, Ebrahim

Abstract

The paper establishes that sovereigns, like banks, need a lender of last resort (LoLR). In the euro area the ECB, with its estimated €3.4 trillion non-inflationary loss absorption capacity, is the only credible sovereign LoLR. The ECB/Eurosystem has been acting as sovereign LoLR through its SMP purchases of periphery sovereign debt in the secondary markets. It has also contributed, through the deeply subsidised bank funding it provided through the 3-year LTROs, half of a mechanism to purchase periphery sovereign debt in the primary issue markets. The other half has been financial repression requiring banks in Italy and Spain to purchase more of their own government’s debt than they would voluntarily and at below-market yields. We expect that, once Spain and Italy are under troika programmes, the Eurosystem will also lend to these sovereigns indirectly, through loans by the national central banks to the IMF which on-lends them to these sovereigns. We recommend that, to increase its effectiveness as LoLR, the ESM be given a banking license. To reduce the illegitimate and unaccountable abuse of the ECB/Eurosystem as a quasi-fiscal actor, we propose that all its credit risk-related losses be jointly and severally guaranteed/indemnified by the 17 euro area member states.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8974.

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Date of creation: May 2012
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Handle: RePEc:cpr:ceprdp:8974

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Related research

Keywords: Central bank; EMU; Financial repression; Lender of Last Resort; Quasi-fiscal activities; Seigniorage;

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Cited by:
  1. Jean Pisani-Ferry & André Sapir & Guntram B. Wolff, . "EU-IMF assistance to euro area countries: an early assessment," Blueprints, Bruegel, number 779, October.
  2. Fawley, Brett W. & Neely, Christopher J., 2013. "Four stories of quantitative easing," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 51-88.
  3. Dermot Hodson, 2013. "The Eurozone in 2012: ‘Whatever It Takes to Preserve the Euro'?," Journal of Common Market Studies, Wiley Blackwell, vol. 51, pages 183-200, 09.
  4. Christophe Blot & Jérôme Creel & Paul Hubert & Fabien Labondance, 2014. "Les enjeux du triple mandant de la BCE," Sciences Po publications info:hdl:2441/5ijkqb693t9, Sciences Po.
  5. Spahn, Peter, 2013. "Subprime and euro crisis: Should we blame the economists?," FZID Discussion Papers 83-2013, University of Hohenheim, Center for Research on Innovation and Services (FZID).
  6. Christophe Blot & Jérôme Creel & Paul Hubert & Fabien Labondance, 2014. "Dealing with the ECB's triple mandate ?," Sciences Po publications info:hdl:2441/53ccj34tat8, Sciences Po.

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